It has been kind of interesting to read various foreign banks’ views on Ukraine at the moment and their spin around the fact that an International Monetary Fund team came to Kyiv and went without inking an agreement on a staff-level agreement on a new $5 billion to $6 billion loan agreement.
The message herein seems to be that any delay in IMF agreeing to a new programme will be short-lived – and some face-saving solution will be reached over tricky issues like PrivatBank.
I really hope they are wrong – this is not a face-saving moment, but a critical (life and death, unfortunately literally) moment in Ukraine’s reform path. Decisions that the IMF makes now will be critical to determining Ukraine’s long-term economic outcome – and hopefully in a very positive direction.
I think we would all generally agree that the IMF team came to Kyiv in September with the intent to come to a new agreement, as messaging beforehand had been incredibly positive on the reform agenda from President Volodymyr Zelensky’s administration – talking about fast-tracking privatization, opening up markets, deregulating, fighting corruption, improving the business environment and pushing on with land reform. They seemed like they were ticking all the right boxes – and markets rewarded them with falling borrowing costs, portfolio inflows, an appreciating currency, and foreign-exchange reserves accumulation.
But something happened while the mission was in Kyiv, and the mission left without inking an agreement. Instead, it gave diplomatic language that talks were continuing.
The IMF made its views, or concerns clear, in the final paragraph or so in the concluding mission statement – in effect the fund is now worried about the Zelensky administration rowing back on the huge achievements made by the previous administration of ex-President Petrol Poroshenko in cleaning up the banking sector, and also linked I think therein major concerns now about attacks (attacks being the operative word there, as central bankers in Ukraine are now subject to physical attack, not the usual verbal attacks) on central bank independence.
All very sad – as I would actually say cleaning up the banking sector, and reform of the National Bank of Ukraine, including making the central bank really independent, as per international standards – were some of the major, hard-fought reform wins of the period since 2015.
Ukraine currently benefits from macroeconomic stability – a remarkable achievement from the devaluation/default/banking collapses of 2014/15, and this is to a significant degree due to the heroes at the NBU and the Ministry of Finance, in delivering that.
Now going back on that, with talk of reversing the PrivatBank nationalisation, and either handing back and/or compensating former owners, would risk blowing all those achievements out of the water. Remember the National Bank of Ukraine/Ministry of Finance had to recapitalize PrivatBank with close to $6 billion in public money – that is money which could have been spent on the military or the poor – but it was spent instead bailing out the costs of mistakes (or worse) by former owners. And read the various reports from Kroll, et al.
Reversal of the PrivatBank nationalization would first of all risk macroeconomic stability – it would risk failure of the banking system, because PrivatVank is still the largest bank in the country, and it is systemic, and runs on the banks and currency would be a real risk.
The consensus is that if courts rule against the nationalization that almost immediately the government would renationalize PrivatBank. But while the previous Poroshenko administration was clear that it would follow this path, the new Zelensky administration has given no such reassurance.
Where does this leave us?
We do not know whether the largest bank in Ukraine will be solvent pending an upcoming judicial decision. Remarkable, this could happen in days, weeks or months. This is not some far distant risk – the risk is now.
And what if the bank is handed back to former shareholders, and/or compensation paid?
Well in that scenario I think you can wave goodbye to any concept of the rule of law in Ukraine.
Notable herein are the actions under way against another former bank owner, Konstantyn Zhevago, for losses incurred in a similar banking collapse. What is the message herein? One rule for one oligarch, a different one for another? There should be a level playing field – business outcomes in Ukraine should not depend on the closeness of an individuals’ relationship to the president. I thought that was what Euromaydan heroes fought against?
Now sure, the Zelensky administration is saying all the right things about privatization, land reform, improving the business environment, etc. But what’s the point of any of that if in reality, a bad decision about Privatbank results – there is no rule of law in effect would be a striking conclusion to be drawn. And this will terminally damage the business environment in Ukraine, deterring domestic and foreign investment, keeping sub-par growth, stalling job creation and ensuring that young, dynamic Ukrainians continue to seek job opportunities abroad, not at home.
I don’t get (well, I think I do, but hope I am wrong) why the Zelensky team does not make their position on PrivatBank and central bank independence clear cut.
It should be a slam dunk – the universal view of the international financial institutions and Western bilateral donors is in support of the NBU position – what are they missing?
The message from the Zelensky team should be we support the international financial institution approach to PrivatBank, and in a scenario where the 2016 nationalization is overturned, we will renationalize the bank unless former owners make the state whole for the $6 billion used to recapitalize the bank. And, that we (the Zelensky administration) stand with (in front would be nice) NBU and government officials who have dealt with the PrivatBank affair. That these people will be protected.
It should be a “read my lips” moment from Zelensky.
And what about the IMF?
PrivatBank is a litmus test – actually the litmus test of this administration’s commitment to improving the rule of law, fighting corruption, improving the business environment.
Land reform is just window dressing compared to the importance of this issue – and will surely fail if the right decisions are not now taken on the PrivatBank issue.
This is a clear-cut case/issue. The IMF is absolutely right to stall signing a loan agreement – indeed as what’s the point putting more money into Ukraine, and supporting any of the other reforms, if, on this fundamental issue, rule of law is so obviously being steamrolled over. And there should be no more financing for Ukraine until the Zelensky administration has made its position clear, and come out in favor of the real heroes in Ukraine – the staff of the central bank and Ministry of Finance who, against huge personal risk to themselves and their families, made the right decisions to clean up the Ukrainian banking sector in 2015-2017. The IMF should stand up in support of reform and reformers in Ukraine.
